The IRS says it will have to cut back on the number of audits its revenue agents conduct. The reason: The agency doesn't have enough money to do its job. Ironic, isn't it?
Because of budget limitations, the number of IRS employees declined by 23% over the last twenty years. The declines continue: 4.7% fewer people worked for the IRS in 2012 compared with 2011. At the same time, the number of tax returns filed has gone up--filings increased 1.8% in 2012 alone. The result has been fewer audits across the board--5.3% fewer audits of individual taxpayers were conducted in 2012 as compared with 2011. However, because the number of returns filed increased, the chance of being audited actually fell by 7%.
There will be even fewer audits in 2013. Recently released IRS management reports show that the IRS plans to expend 18% less effort auditing corporations with assets of $10 million or more compared with 2011. It also plans reductions in the effort spent auditing smaller corporations, S corporations, and specific industries.
There is just one category of audits that the IRS does not plan to further reduce: those of individual taxpayers. Indeed, the agency plans to increased the manpower it spends on individual audits by 9% over 2011. It's unclear why the agency has made this choice. But, the new emphasis on individuals audits should bring your audit risk for 2013 to about the same as it was in 2011.
These planned reductions do not include any additional cuts that may be required due to the budget sequestration debacle. For details, see the Nolo article, "What Is the Impact of a Budget Sequester on the IRS?"
One way the IRS has attempted to deal with the decline in its staffing is to increase the number of correspondence audits, while reducing the number of old-fashioned face-to-face audits. Correspondence audits are semi-automated, with IRS computers doing most of the work. IRS data shows that while face-to-face audits dropped by more than half in the last 20 years, correspondence audits nearly tripled. Although correspondence audits take less manpower that face-to-face audits, they also are more limited in scope, usually limited to one or two tax issues. The lack of in-depth face-to-face audits may make it easier for wealthier taxpayers to avoid or evade taxes.